Levelling the playing field : achieving fair business banking

On Thursday 27th April 2017, the Dispute Resolution Team at MBM Commercial held the third in their series of annual conferences. Building on the success of the previous two, which looked at the changing banking landscape, and at particular financial challenges for entrepreneurial businesses, this year’s conference theme addressed the need to level the playing field in terms of achieving fair business banking.

The conference looked at both the worst and the best in fair business banking. If there’s a spectrum of bank behaviour, our first speaker, from Nikki Turner, had definitely experienced the worst, as one of the victims of the HBOS Reading fraud for which a number of bankers were recently jailed. Nikki also co-founded SME Alliance Ltd and has become a tireless campaigner for improving access to justice for SMEs.

Nikki’s story, told for the first time (previously she had been unable to speak because the case was sub-judice) was both a fascinating and a harrowing one. She outlined the fraud which had been in operation at HBOS Reading for many years, in which over 70 companies had been targeted by the relationship managers and systematically bled dry of funds. Many – indeed most – of the companies involved had subsequently gone under and the cost to the bank was close to 1 billion.

In her own case, the company which she and her husband ran had been systematically defrauded of money to the point where it could not continue: it was liquidated and the bank then attempted to evict the couple a total of 22 times. At the eventual fraud trial, bankers who had been involved were jailed for a total of almost 50 years. However, she made the point that there needs to be clear accountability on the part of the bank for allowing the fraud to happen, for so long, and for not listening earlier to the victims. A compensation scheme providing redress to victims is still be worked out.

The conference then heard from another tireless campaigner working to improve banking relationships for SMEs: Heather Buchanan is the Director of Policy for the All Party Parliamentary Group on Fair Business Banking, who addressed delegates on the work currently being undertaken by the APPG – unfortunately now suspended until the General Election has taken place! - and in particular its focus on access to justice and the need to create an independent financial services tribunal system.

Heather explained that the APPG on Fair Business Banking is made up of 135 MPs and peers. The group was originally formed in 2012 for the limited purpose of addressing the misselling of interest rate hedging products, and had been intended to be in existence for no more than a year. Some years on, however, it was clear that there was a wider issue of fair banking, beyond simply the missale of “swaps”. As APPGs dissolve with the dissolution of Parliament when an election is called, this particular APPG re-emerged after the 2015 election with a broader and expanded remit to deal with a wide range of business banking issues.

Commercial lending is entirely unregulated – a little known fact – and the APPG is particularly focussed on realistic and achievable legislative change that would provide greater checks and balances in the commercial lending arena. Heather was keen to emphasise that the APPG were not looking for prescriptive regulation, and were keen to work with banks to ensure that the lending contracts offered by banks support the principles recently enounced by the Lending Standards Board.

Heather also explained that the APPG were campaigning for an independent Financial Tribunal system. In this they were delighted to have the support of Andrew Bailey, the head of the Financial Conduct Authority, and one of the issues it was hoped that such a dispute resolution process would be able to deal with was the issue of creditor misconduct where unfair behaviour on the part of for example a creditor such as a bank had resulted in an insolvency process for the borrower company. The system did not currently have the right checks and balances in it and the APPG is working closely with the FCA, ICA in England and Wales and ICAS in Scotland to try to ensure a greater balance in insolvency processes involving SME companies.

Professor Hector McQueen of Edinburgh University also joined the conference from the Scottish Law Commission where he is currently a full time Commissioner. He looked in particular at good faith in banking, and whether there is a need for the UK to move to a more positive requirement for good faith to be embedded in banking contracts. He explained that the SLC had just completed a joint project with the English Law Commission on insurance to provide greater protection for small businesses, and that the work done in this area might be capable of being “translated across” to banking contracts. There was certainly merit at looking at the sort of model agreed in the insurance industry and using that as a blueprint.

Professor McQueen then turned to look at good faith in contracts and in particular in banking law, highlighting that in the 1997 case of Smith v Bank of Scotland, the court had found that the bank had an active duty of good faith which resulted in a Personal Guarantee becoming unenforceable. Whilst this had been watered down by the courts over the years, there were still elements of good faith being implied in certain contracts, although the difficulty with an implied term that it was easy to contract out of.

Interestingly, Professor McQueen compared and contrasted the position in the US, always thought of as one of the more “laissez faire” economies, where the Uniform Commercial Code stipulates that “every contract imposes an obligation of good faith and fair dealing”. The Code goes on to define good faith as “honesty in the conduct or transaction concerned”, and “observance of reasonable standards of fair dealing in the trade”. Professor McQueen argued that if good faith was found in a very successful world economy such as the US, this indicated that good faith in itself was not going to lead to destruction of our economy if it were introduced, and with so much of our legislation up in the air thanks to the Great Repeal Bill, there was all to play for.

We then moved to the more positive end of our banking spectrum with talks from 2 banks with a great reputation for supporting their clients and a special focus on the start-up and SME community.

Ian Mason is Head of Development at Virgin Start Up, and spoke of the work undertaken by the organisation as a delivery of the Government’s Start Up Loans company, helping over 1700 entrepreneurs across England and Scotland in just 3 years. He explained that as a business, Virgin know start-up and have lived start-up: it is an organisation created by entrepreneurs for entrepreneurs. Virgin Start-Up’s aim was to provide fledgling businesses with the right tools and equipment to succeed.

He also referred to the US start-up market, highlighting that in the US, 20% of all businesses have between 10 and 49 employees. In the UK by contrast, just 3.7% of businesses are this size. This illustrated that as a country, we are not good at turning successful startups into high growth companies. However, Virgin StartUp aimed to change that by providing master classes, accelerator programmes, and one to one business advisors, helping to turn entrepreneurial dreams into economic reality. The key was implementation and scaling.

Finally, the conference heard from keynote speaker Craig Donaldson, the CEO of Metro Bank, one of the newer entrants into the banking market, who have made great strides since their inception in 2010. In just 7 years they have grown to almost 50 stores and following their listing in March 2016, are now at c 150 in the FTSE index.

Craig spoke of the “Metro Bank journey” and his Damascus moment which propelled him into starting up a new bank and aiming to start with a clean sheet, doing things the right way by getting the culture and standards right in banks in order to improve competition and choice for businesses. Amazingly, the last time a totally new application for banking licence from a standing start was received was in 1879! Metrobank was therefore new in every sense, and their clearly articulated aim was to do things very differently. As part of that process, Craig had googled the top 10 things people hated about banks, and then set about tackling each one in turn to make sure that Metrobank did not adopt a single one of the top 10 hated behaviours and practices. Sundays, for example, is the bank’s busiest day. The vast majority of the business accounts and business servicing is done on a Sunday. Metrobank similarly does not take any bank holidays. Craig was proud to assert that Metrobank’s net Promoter Score amongst customers was 83%, with brand recognition now at 85%. The bank had done over £1 billion of net lending to SME customers this year, and was the number 2 biggest net lender to businesses in the UK in 2015.

With such a varied panel of speakers, it will be difficult to top 2017’s financial conference, but plans are already underway for Dispute Resolution’s 2018 Financial Conference!

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